N.C. Business Court Opinions, January 17, 2024 – January 30, 2024

Cardiorentis AG v. IQVIA Ltd., 2024 NCBC 2 (N.C. Super. Ct. Jan. 18, 2024) (Conrad, J.)

Key Terms: N.C.G.S. § 1-75.12; inconvenient forum; stay; administrative dismissal

Shortly after Plaintiff filed suit in 2018, Defendants moved to stay the case under N.C.G.S. § 1-75.12(a) arguing that North Carolina was an inconvenient forum and that Plaintiff’s claims should be litigated in England. The Court granted the stay and the parties litigated their dispute in England, resulting in a final judgment in 2022. Defendants then moved to dismiss the complaint administratively under section 1-75.12(b), which provides that the “jurisdiction of the court continues for a period of five years from the entry of the last order affecting the stay.” Since no orders had been entered modifying the stay since it was entered more than five years ago, and the Plaintiff had not responded to Defendants’ motion to dismiss, the Court granted the motion and dismissed all claims.

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CTS Metrolina, LLC v. Berastain, 2024 NCBC Order 8 (N.C. Super. Ct. Jan. 19, 2024) (Earp, J.)

Key Terms: preliminary injunction; restrictive covenant; non-compete; asset purchase agreement; material breach; prior pending action doctrine; arbitration; blue-pencil rule; look-back rule

In 2022, Defendants Berastain and Moreau sold the assets of their company to CTS Metrolina in exchange for $3.6 million and minority non-voting interests in CTS Metrolina and were promised an Earnout Payment and a true up of working capital. They also accepted co-president positions with CTS Metrolina and signed employment agreements and restrictive covenants. The following year, Berastain and Moreau sued CTS Metrolina seeking to invalidate the acquisition; however, that lawsuit was stayed pending arbitration. After Berastain’s and Moreau’s employment with CTS Metrolina ended, CTS Metrolina filed suit against them and moved for a preliminary injunction enjoining them from violating their restrictive covenants based upon allegations that they were involved in a competing business.

Defendants challenged the Court’s jurisdiction arguing that 1) the parties had agreed to arbitrate claims related to the restrictive covenants and 2) any injunctive relief should be sought in the prior pending lawsuit. The Court disagreed. Although the APA and the employment agreements contained arbitration provisions, those provisions gave way to the restrictive covenants which specified that CTS Metrolina could seek enforcement of the restrictive covenants “by any court having jurisdiction.” In addition, the prior pending action doctrine did not apply because the two actions involved different parties, issues, and relief.

Defendants also argued that they were relieved from their obligations under the restrictive covenants because CTS Metrolina had breached the APA by not paying them the Earnout Payment or the working capital true up. However, the Court was unable to conclude that this conduct was a material breach going to the very heart of the APA sufficient to excuse Defendants from their obligations under the restrictive covenants.

Turning to the request for a preliminary injunction, the Court first determined that a five-year restrictive period (or even a six-year period if the look-back rule applied) was not unreasonable in the context of the sale of a business involving sophisticated parties dealing at arms-length. Next, the Court determined that the noncompetition covenant had been drafted such that the Court could blue pencil and refuse to enforce any overbroad geographic provisions and that the remaining restricted territory was not unreasonable. Finally, the Court concluded that, based on the evidence presented, CTS Metrolina was likely to succeed on its claim that the individual Defendants had violated one or more of the restrictive covenants. Accordingly, the Court granted the motion and enjoined the individual Defendants (and their agents) from further violations of the restrictive covenants.

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Brakebush Bros., Inc. v. Certain Underwriters at Lloyd’s of London – Novae 2007 Syndicate Subscribing to Pol’y No. 93PRX17F157, 2024 NCBC Order 9 (N.C. Super. Ct. Jan. 22, 2024) (Davis, J.)

Key Terms: discovery violation; untimely production; eve of trial; Rule 37; sanctions; attorneys’ fees; adverse inference instruction

As summarized here and here, this suit involves a dispute between Plaintiffs and a number of insurance companies over the amount of insurance proceeds payable under excess insurance policies issued by Defendants following a fire that occurred at a chicken plant. The case proceeded through discovery and motions practice and was scheduled for trial in late January 2024. The day before the parties were to exchange trial exhibit lists, Plaintiffs produced, for the first time, two sets of materials, including extensive handwritten notes by an executive of Plaintiff Brakebush and a cache of photos and videos. Following a status conference, Defendants moved for sanctions for discovery violations and the Court canceled the trial, to be rescheduled at a later date.

The Court denied Defendants’ requests to bar Plaintiffs from using the documents at trial and to give an adverse inference jury instruction. The documents were highly relevant to the key issues in the case and therefore should be allowed to be offered as evidence. In addition, an adverse inference instruction was not appropriate because the documents had not been destroyed. However, the Court granted Defendants’ requests for an order allowing them to conduct additional discovery regarding the documents and awarding their reasonable attorneys’ fees incurred from the motion for sanctions and from the subsequent discovery. Additional discovery was needed to ameliorate any prejudice caused to Defendants by the late production and monetary sanctions were appropriate under Rule 37 as the untimely production was not substantially justified.

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Howard v. IOMAXIS, LLC, 2024 NCBC Order 10 (N.C. Super. Ct. Jan. 25, 2024) (Earp, J.)

Key Terms: limited receiver; economic interest; fraud; rights adversely affected

As summarized here, this action involves a dispute between the Ronald E. Howard Revocable Trust (a purported 51% economic interest holder in IOMAXIS) and the IOMAXIS members regarding the Trust’s right to the economic benefits from its interest. Following discovery, the Trust moved for the appointment of a receiver, based on allegations that the IOMAXIS Defendants had formulated and were actively implementing a plan to transfer assets, disguise distributions paid to other interest holders, and dilute the Trust’s economic interest.

The Court granted the motion and appointed the Finley Group as limited receiver for IOMAXIS. A receiver was necessary and appropriate based on evidence that 1) the IOMAXIS Defendants had set up a new entity to take control of IOMAXIS and had exchanged their interests in IOMAXIS for like interests in the new entity; 2) the new entity had sold IOMAXIS’s assets without accounting for the proceeds; 3) the IOMAXIS Defendants had plans to develop additional entities to move more of IOMAXIS’s assets; and 4) the IOMAXIS Defendants had converted their capital accounts in IOMAXIS to loans so they (but not the Trust) could receive “repayments” rather than distributions. This evidence combined with the IOMAXIS Defendants’ adamance that Plaintiffs were not entitled to review financial information and their disregard for the Trust generally was sufficient for the Court to conclude that the Plaintiffs had shown a reasonable likelihood of success on their fraud-based claims and that their rights in the assets of IOMAXIS may be adversely impacted during the suit. The receiver was directed to, among other things, review IOMAXIS’s books and records, investigate any planned or actual transfers of IOMAXIS’s assets, identify any entities formed by the IOMAXIS Defendants, and ascertain the terms of any agreement between IOMAXIS and the newly created entity.

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Miller v. RedGoose, L.L.C., 2024 NCBC Order 11 (N.C. Super. Ct. Jan. 30, 2024) (Bledsoe, C.J.)

Key Terms: notice of designation; opposition; counterclaim; N.C.G.S. § 7A-45.4(a)(5); intellectual property

Defendant RedGoose filed a notice of designation of action as a mandatory complex business case pursuant to N.C.G.S. § 7A-45.4(a)(5) based on its counterclaims for fraud, conversion, tortious interference with contract, and unfair and deceptive trade practices. Plaintiff opposed designation arguing that designation was improper because the counterclaims did not involve intellectual property and because the allegations in the counterclaims were false.

The Court overruled Plaintiff’s opposition to designation. First, each of the counterclaims was based on Plaintiff’s alleged misuse of RedGoose’s software, IT systems, and client data and data security, which satisfied the statutory requirement of a dispute involving the use of intellectual property. The fact that the words “intellectual property” were not used in the counterclaims was irrelevant since the Court assesses designation based not only on the claims asserted but also on the underlying factual allegations. Second, Plaintiff’s challenge to the truthfulness of the allegations was misplaced and premature because allegations in the subject pleading are accepted as true for the purposes of determining whether a case qualifies for mandatory complex business designation. Accordingly, the Court did not consider the affidavits proffered by the parties in opposition to and in support of designation.

By: Ashley B. Oldfield

To subscribe to RCD’s Business Court Blast, email Ashley Oldfield at aoldfield@rcdlaw.net.

The information in this article is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation.

Posted 01/30/24

N.C. Business Court Opinions, January 3, 2024 – January 16, 2024

BIOMILQ, Inc. v. Guiliano, 2023 NCBC 91A (N.C. Super. Ct. Jan. 9, 2024) (Robinson, J.)

Key Terms: Rule 12(b)(5); amended order; dismissal without prejudice

As summarized here, the Court previously entered an order granting Counterclaim-Defendants’ motions to dismiss pursuant to Rule 12(b)(5). The Court entered this amended order to clarify three things: 1) that the dismissals were without prejudice; 2) that the Court had not considered affidavits of service filed after full briefing and a hearing on the motions; and 3) to correct the date of the hearing.

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Johnson v. Everett, 2024 NCBC 1 (N.C. Super. Ct. Jan. 5, 2024) (Davis, J.)

Key Terms: motion for judgment on the pleadings; Rule 12(c); fraud; quantum meruit; constructive fraud; conspiracy

Defendant Brian Estes filed a Motion for Judgment on the Pleadings as to the claims against him for quantum meruit, constructive fraud, conspiracy, and fraud. Generally, Plaintiffs alleged that Defendants engaged in a scheme whereby Plaintiffs invested in Defendants’ company that was seeking a patent for a stair box system and then, using Plaintiffs’ investments and other assets of the first company, formed a separate company, to the exclusion of Plaintiffs, and when the patent was granted, assigned the patent for the product to the new company. Defendant Estes assisted in the formation of the second, competing company and was allegedly involved in its operations that took place to the detriment of the company Plaintiffs invested in.

Fraud: The Court dismissed with prejudice Plaintiffs’ fraud claim against Estes as Plaintiffs conceded at the hearing that their allegations were insufficient to state a valid claim for fraud against Estes.

Quantum Meruit: The Court dismissed with prejudice this claim as well because Plaintiffs’ allegations failed to meet the first required element of a claim for quantum meruit – that Plaintiffs rendered services to Estes.

Constructive Fraud: The Court also dismissed with prejudice the constructive fraud claim because Plaintiffs did not allege the existence of a de jure fiduciary relationship between them and Estes and the allegations in the complaint could not reasonably be construed as asserting the existence of a de facto fiduciary relationship either.

Conspiracy: With respect to Estes, Plaintiffs alleged that he joined the other Defendants’ conspiracy shortly after the new, competing company was formed, agreed to participate in the unlawful conduct of Defendants thereafter, and did participate in such unlawful conduct by sending an email to Plaintiffs explaining their options related to the failure of their investments in the original company. Estes argued that the purpose of the conspiracy (using Plaintiffs’ money to form the competing company) was accomplished before he became involved with Defendants and therefore, he cannot be liable for any such conspiracy. While the Court found that Plaintiffs’ conspiracy allegations were “not a model of specificity,” they were nevertheless, sufficient to allow the conspiracy claim against Estes to go forward. The Court therefore denied Estes’ motion as to Plaintiffs’ civil conspiracy claim.

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Live Oak Banking Co. v. Mafic USA LLC, 2024 NCBC Order 2 (N.C. Super. Ct. Jan. 3, 2024) (Conrad, J.)

Key Terms: claim objections; receivership; receivership estate; N.C. Commercial Receivership Act; Bankruptcy Code; proof of claim

Following the appointment of a Receiver over Defendant Mafic to oversee an orderly liquidation process, the Receiver objected to nine creditors’ proofs of claims. The Court looked to the Bankruptcy Code as an instructive guide for the framework related to the presentation of evidence and burden of proof necessary to determine the reasonableness or validity of a claim accepted or rejected by a Receiver. The Court determined that all of the challenged claims against Mafic arose under contract law and therefore that the claimants bore the burden of proving the existence and breach of a valid contract by a preponderance of the evidence.

AFC Worldwide Express Inc.: AFC claimed that Mafic owed it $13,045.57 for freight services, but only attached an account statement listing dates and amounts of invoices, but not the invoices themselves, to its proof of claim. The Receiver submitted evidence that Mafic never received the invoices or purchased goods or services from AFC on the dates listed on the account statement. AFC did not appear at the hearing and the Court found that the Receiver successfully rebutted the proof of claim, sustained his objection, and disallowed AFC’s claim.

Alvaro Ruiz Emparanza: Ruiz, a former employee of Mafic, claimed that Mafic owed him $99,875.00 in bonus payments based on an alleged employment contract. Based on the language of the document, entitled an “Employment Proposal Letter,” the Receiver argued and the Court agreed that the document was an unenforceable agreement to agree and Ruiz did not carry his burden to establish the existence of a valid contract. The Court disallowed his claim.

CP Metal Crafters, Inc.: CP Metal Crafters claimed that Mafic owed it $54,548.76 for goods sold and the Receiver conceded that Mafic owes $31,297.50 in unpaid invoices but objected that it had no record of invoices above that amount. CP Metal Crafters did not appear at the hearing or offer evidence in response to the objection. The Court sustained the Receiver’s objection, allowing an unsecured claim for $31,297.50, and disallowing the remainder of the claim.

JEC Group: JEC Group claimed that Mafic owed it €15,096.80 for cancelling Mafic’s planned participation in a trade show in 2023. The Court found that the terms of the relevant contract stated it would only become effective upon JEC Group’s receipt of a down payment from Mafic and the Receiver presented evidence that Mafic never made such a down payment. JEC Group did not appear at the hearing or offer evidence to show that a valid contract existed between it and Mafic. As a result, the Court disallowed the claim in its entirety.

Metallix Refining Inc.: Metallix Refining claimed that Mafic failed to pay two invoices—one totaling $1,850 and the other $1,400—for goods and shipping charges, but the Receiver offered evidence, which Metallix Refining failed to dispute, that Mafic only received the $1,400 invoice. The Court found that the Receiver rebutted Metallix Refining’s claim, sustained his objection, allowed an unsecured claim for $1,400, and disallowed the remainder of the claim.

Pitney Bowes Inc.: Pitney Bowes claimed that Mafic owed it $1,091.50 arising from its rejection of an equipment lease, and attached an account statement but failed to attach the lease to its proof of claim. The Receiver offered evidence from Mafic’s records to show that it owed only $195.25 in unpaid invoices to Pitney Bowes, which the creditor did not rebut. The Court sustained the Receiver’s objection, allowed an unsecured claim for $195.25, and disallowed the remainder of the claim.

R+L Carriers, Inc.: In support of its claim, R+L Carriers attached four invoices for $15,342.34 for freight services performed for Mafic. The Receiver objected that Mafic owes only $2,200.05 and presented invoices at the hearing showing that R+L Carriers gave Mafic a discount on each charge so that the total amount due is only $2,200.05. R+L Carriers did not appear at the hearing or present additional evidence in response to the objection. The Court concluded that the Receiver rebutted the claim, sustained his objection, allowed an unsecured claim for $2,200.05, and disallowed the remainder of the claim.

Université de Sherbrooke: Sherbrooke submitted a proof-of-claim form stating that Mafic owes a substantial sum under a research agreement, but Sherbrooke’s agreement was with “Mafic Inc.”—not Mafic USA. At the hearing, the Receiver represented that officials of Sherbrooke acknowledged the mistaken identity and agree with his objection. The Court sustained the objection and disallowed the claim.

Electric Glass Fiber America, LLC: EGFA submitted a claim for $73,864.24 four days after the deadline to submit claims and the Court disallowed it as untimely.

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Chi v. N. Riverfront Marina & Hotel LLLP; Feng v. N. Riverfront Marina & Hotel LLLP, 2024 NCBC Order 3 (N.C. Super. Ct. Jan. 5, 2024) (Earp, J.)

Key Terms: motion for leave to withdraw; failure to communicate with counsel; failure to pay attorneys’ fees; financial hardship; North Carolina Rule of Professional Conduct 1.16; justifiable cause; foreign language; conditional withdrawal; procedural protections

Plaintiffs’ counsel initially filed a motion for leave to withdraw from the representation of six Plaintiffs, who are all Chinese nationals. In the motion, Plaintiffs’ counsel maintained that withdrawal was appropriate pursuant to North Carolina Rule of Professional Conduct 1.16 because the Six Plaintiffs had both failed to communicate with counsel and to pay their attorneys’ fees, and that continued representation would lead to unreasonable financial hardship. Plaintiffs’ counsel subsequently filed a second motion to withdraw from representation of all Plaintiffs relying on the same arguments as in their first motion to withdraw. Defendants opposed the motion citing Plaintiffs’ lack of fluency in English, failure of Plaintiffs’ counsel to ensure that substitute counsel had been retained, and concern over delays in the litigation. Five Plaintiffs consented to the withdrawal of counsel and four of those five subsequently settled with the Defendants.

Although the Court found that justifiable cause for Plaintiffs’ counsel to withdraw existed and that Plaintiffs’ counsel gave reasonable notice of withdrawal to the Plaintiffs, the burden on Defendants and the Court of allowing Plaintiffs’ counsel to withdraw without procedural protections in place would be unreasonable. Therefore, the Court conditioned Plaintiffs’ counsel’s withdraw upon “assurances that each Plaintiff (1) is able to communicate with opposing counsel and the Court (including, if necessary, by having access to a translator at their cost), (2) understands his/her obligations pursuant to the North Carolina Rules of Civil Procedure, the Case Management Order, and the Court’s Rules, (3) has an account on the Court’s electronic filing system and is able to serve and be served with pleadings and to receive electronic notices from the Court, and (4) understands his/her obligation to provide and maintain with the Court reliable contact information.” In addition, given that the deadline to complete fact discovery was near, counsel’s withdrawal would not be permitted until fact discovery had been completed.

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Rockingham Cnty. v. NTE Energy, LLC, 2024 NCBC Order 4 (N.C. Super. Ct. Jan. 8, 2024) (Bledsoe, C.J.)

Key Terms: notice of designation; opposition; law governing corporations, LLCs, partnerships; N.C.G.S. 7A-45.4(a)(1); amended complaint; piercing the corporate veil; joint enterprise

Defendants filed a notice of designation of action as a mandatory complex business case pursuant to N.C.G.S. § 7A-45.4(a)(1) after Plaintiff Rockingham County amended its original complaint to include numerous additional claims against Defendants. The County opposed designation arguing that designation was improper because its claims did not assert complex questions involving the law governing corporations and because any corporate law allegations of the amended complaint were ancillary to the material issues in the case.

The Court disagreed because the complexity of the case had no bearing on the propriety of designation, and the allegations implicating the law governing corporations, LLCs, or partnerships, including piercing the corporate veil, were not ancillary issues. Citing an array of allegations from the Plaintiff’s amended complaint, the Court found that the “law governing corporations, partnerships, and LLCs is material to the issue of which Defendant entity (or entities) is liable to the County for the misconduct alleged.” The Court also noted that because the County is master of its complaint and chose to amend its complaint to include issues involving the law governing corporations, partnerships, and LLCs, it must accept the consequence that the action now qualified for designation. The Court overruled the County’s opposition to designation.

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Potts v. Steel Tube, Inc. 2024 NCBC Order 5 (N.C. Super. Ct. Jan. 12, 2024) (Conrad, J.)

Key Terms: charging order; judgment creditors; Board of CPA Examiners; involuntary transfer of ownership interest

Following entry of a judgment in favor of Judgment Creditors, the Court issued an order in July 2020 charging Defendant Rives’ ownership interest in Rives & Associates, LLP (“R&A”) and several other entities with the unsatisfied amount of the judgment. In Rives’ discovery responses leading up to entry of the charging order, Rives stated that there had been discussions regarding the cancellation or repurchase of his ownership interests in R&A but that no transfer of ownership had occurred. Long after entry of the charging order, the Judgment Creditors learned that Rives had, pursuant to an Involuntary Agreement, surrendered his interest in R&A due to his suspension by the N.C. Board of Certified Public Accountant Examiners and that he claimed to have received no consideration for said transfer and that the transfer had occurred prior to entry of the charging order. Believing that the Involuntary Agreement was a sham designed to conceal the transfer of Rives’ interest to his wife, Judgment Creditors moved to enforce the charging order and for an order appointing a receiver and directing Rives and R&A to appear and show cause why they should not be held in civil contempt.

Despite some discrepancies regarding the date the Involuntary Agreement was entered into, the Court found that the Involuntary Agreement had been finalized prior to entry of the charging order. Therefore, since the charging order charged an interest that Rives did not actually possess, and the evidence showed that Rives had not received any payments on account of that interest after entry of the charging order, Rives had not violated the charging order. Further, while Rives may have subsequently made false statements to the IRS and NCDOR regarding his status with R&A, such statements were not a violation of the charging order. Finally, to the extent Judgment Creditors sought to have the transfer set aside as fraudulent, the proper remedy was to bring a civil action under the Uniform Voidable Transactions Act.

Nevertheless, based on Rives’ previous lack of candor, the Court found it appropriate to enter an order enjoining Rives from transferring or otherwise disposing of his ownership interests in the other entities subject to the charging order.

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Bui v. Phan, 2024 NCBC Order 6 (N.C. Super. Ct. Jan. 12, 2024) (Bledsoe, C.J.)

Key Terms: order on designation; N.C.G.S. § 7A-45.4(a)(1); breach of operating agreement; law governing LLCs

Plaintiff filed suit alleging that she and Defendant Phan are 50/50 member-managers of Defendant Golden Rooster, LLC, and that while she and Phan were negotiating the buyout of her membership interest, Phan took several unilateral actions on behalf of Golden Rooster which violated its operating agreement. Plaintiff asserted a claim for breach of the operating agreement and sought a judicial declaration that Phan is subject to expulsion from membership in Golden Rooster pursuant to the operating agreement. Plaintiff filed a notice of designation, contending that designation as a mandatory complex business case is proper under N.C.G.S. § 7A-45.4(a)(1), which provides for designation in actions involving a material issue related to disputes involving the law governing LLCs.

The Court determined that the action should not proceed as a mandatory complex business case as the resolution of Plaintiff’s asserted claims required only a straightforward application of contract law principles.

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James H.Q. Davis Tr. v. JHD Props., LLC, 2024 NCBC Order 7 (N.C. Super. Ct. Jan. 16, 2024) (Bledsoe, C.J.)

Key Terms: stay pending appeal; sua sponte order; summary judgment; judicial dissolution; N.C.G.S. § 1-294; N.C.G.S. § 7A-27; appeal from final order of Business Court; North Carolina Supreme Court; North Carolina Court of Appeals

As summarized here, the Court previously entered an Order granting Plaintiffs’ motion for summary judgment, denying Defendant’s motion for summary judgment, and entering summary judgment for Plaintiffs on their claim for judicial dissolution. Thereafter, Defendant filed a notice of appeal of the Order to the N.C. Court of Appeals. After the Court noticed a status conference to discuss the process for dissolution and winding up, Defendant contended that as a result of the appeal, further proceedings in the trial court were stayed pursuant to N.C.G.S. § 1-294. Plaintiffs responded that Defendant’s failure to timely file an appeal with the N.C. Supreme Court, as required by N.C.G.S. § 7A-27, rendered the appeal without legal effect and therefore the Court retained jurisdiction to proceed with dissolution.

The Court agreed with Plaintiffs. The Court of Appeals lacks jurisdiction over appeals from orders of the Business Court because such appeals must be brought in the Supreme Court. Accordingly, Defendant’s appeal to the Court of Appeals was without legal effect, subject to dismissal, and was not and could not be perfected. Additionally, since the time for Defendant to file its appeal of the summary judgment order expired without Defendant filing an appeal in the proper court, Defendant had not and could not belatedly perfect a newly filed appeal in the Supreme Court. Therefore, the Court found it was not divested of jurisdiction, the stay provisions of section 1-294 did not apply, and the Court could proceed to consider the dissolution of the two defendant LLCs at issue.

By: Rachel E. Brinson

To subscribe to RCD’s Business Court Blast, email Ashley Oldfield at aoldfield@rcdlaw.net.

The information in this article is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation.

Posted 01/17/24

N.C. Business Court Opinions, December 20, 2023 – January 2, 2024

Husqvarna Pro. Prods., Inc. v. Robin Autopilot Holdings, LLC, 2023 NCBC 88 (N.C. Super. Ct. Dec. 22, 2023) (Bledsoe, C.J.)

Key Terms: Rule 15; amended complaint; futility; 12(b)(6); breach of fiduciary duty; tortious interference; anticipatory repudiation

As previously summarized here, this dispute arose from a series of agreements entered into by parties associated with Husqvarna and parties associated with Robin Autopilot. Husqvarna sought leave to amend its complaint to supplement the complaint’s factual allegations, add Robin Autopilot’s formed CEO, Logan Fahey, as a defendant, assert additional claims, and reassert certain existing claims. Defendant Robin Autopilot opposed the motion on the basis of futility.

Breach of Fiduciary Duty Claim against Fahey. The Court denied Plaintiff’s motion to amend to add a derivative claim for breach of fiduciary duty against Fahey because Plaintiff had failed to make a written pre-suit demand as required by the governing Ohio LLC statute. The Court found no basis to read a futility exception into the Ohio law as urged by Plaintiff. Accordingly, the claim was futile because Plaintiff lacked standing to assert it.

Tortious Interference Claim against Fahey. The Court granted Plaintiff’s motion to add tortious interference with contract claims against Fahey. The Court noted that Plaintiff’s allegations of malice made “upon information and belief” were sufficient to survive a 12(b)(6) dismissal motion. Additionally, the Court rejected Robin Autopilot’s public policy argument, stating that North Carolina law permits a party to seek to hold a corporate officer accountable for tortiously interfering with their company’s contracts for their own personal benefit.

Anticipatory Repudiation. The Court granted Plaintiff’s motion as to its reasserted claims for anticipatory breach of contract. Robin Autopilot argued that the claim, which stems from a memo sent by Fahey to Plaintiff, was futile. Robin Autopilot based its argument on language found in the Court’s Order and Opinion on Plaintiff’s Motion to Dismiss Amended Counterclaims from November 2023, in which the Court concluded that the memo was not a “distinct, unequivocal, and absolute refusal to perform.” The Court held that its Order did not resolve issues of fact and did not constitute a holding in regard to the memo’s interpretation.

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McFee v. Presley, 2023 NCBC 89 (N.C. Super. Ct. Dec. 28, 2023) (Conrad, J.)

Key Terms: summary judgment; 12(b)(6); fraudulent transfer; fraud; statute of limitations; breach of fiduciary duty; N.C.G.S § 39-23.4; unjust enrichment

Plaintiff Jacqueline McFee served as the lead designer for CPP, a stationery and office supply company, for ten years. Defendant William Presley served as CPP’s President, CEO, and partial owner during the relevant period. In 2008, McFee became a Class B member of CPP with 10% of non-voting stock. At that time, McFee entered into a written employment agreement with CPP, which assigned all intellectual property rights in her design work to CPP but granted McFee the option to reclaim the intellectual property rights if certain events occurred. McFee alleged that Defendant falsely promised to protect her intellectual property rights and ensure that CPP would reassign them to her when the time arose.

After CPP’s business went into decline, McFee and other Class B members abandoned their membership interests in 2013. McFee alleged that prior to her abandoning her membership interest, Defendant falsely represented to her that CPP’s poor performance had rendered her membership interest worthless. After CPP terminated McFee’s employment, she requested that she be reassigned the rights to her design. Defendant refused McFee’s request. McFee subsequently sued CPP in both federal and state court over the dispute and she obtained a default judgment against CPP in the state action. During the pendency of the state action, CPP sold some of its assets for $11 million to a company called Pacon and used the profits to pay off a secured lender, make a distribution to Defendant, and retained a portion as capital. Defendant resigned from CPP in 2017. After CPP defaulted on a line of credit in 2019, CPP’s lender foreclosed on its assets used as collateral and sold them to a company called Bay Sales.

In 2021, McFee filed the present lawsuit against Defendant for fraud, unjust enrichment, breach of fiduciary duty, and constructive fraud. McFee also alleged that the Pacon sale and Bay Sales foreclosure sale were fraudulent transfers. The parties filed cross-motions for summary judgment.

Fraudulent Transfer—N.C.G.S. § 39-23.5(b). The Court granted Defendant’s motion as to McFee’s claim under N.C.G.S. § 39-23.5(b) as the one-year statute of limitations precluded the claim.

Fraudulent Transfer—N.C.G.S. §39-23.4(a)(1) (Pacon Sale). The Court granted Defendant’s motion for summary judgment and denied McFee’s cross-motion on the basis that the claim was untimely. N.C.G.S. §39-23.4(a)(1) provides a limitations period of “not later than four years after the transfer was made . . . or, if later, not later than one year after the transfer . . . was or could reasonably have been discovered.” Noting that the sale occurred in 2017, and the undisputed evidence suggested that McFee received actual notice of the sale in 2019, the Court dismissed McFee’s claim as untimely.

Fraudulent Transfer—N.C.G.S. §39-23.4(a)(1) (Bay Sales Foreclosure Sale). The Court granted Defendant’s motion and denied McFee’s cross-motion as to the Bay Sales foreclosure sale, as the foreclosure sale did not constitute a “transfer” under the statute. The statute defines “transfer” as disposal of an “asset” and defines “asset” to exclude property encumbered by a valid lien. The evidence showed that the property sold to Bay Sales was collateral encumbered by a valid lien.

Fraud. The Court granted Defendant’s motion as to McFee’s fraud claim on the basis that it was untimely and lacked evidence to survive dismissal on the merits of the claim. McFee failed to provide evidence which would create a genuine issue of material fact concerning when her fraud claim accrued. The Court noted that, by McFee’s own admission, she was aware of the alleged fraud when she initiated suit in state court in 2017. Additionally, Defendant’s arguments and evidence relating to the merits of the claim remained unrebutted by McFee. As such, McFee’s claim was dismissed.

Unjust Enrichment. The Court granted Defendant’s motion as to McFee’s unjust enrichment claim as it related to the Pacon sale (2017), holding that the statute of limitations for unjust enrichment (3 years) barred recovery for McFee’s claim, which was filed in 2021. The Court held that McFee’s claim was not time-barred as it related to the Bay Sales foreclosure sale (2019). However, after analyzing the merits of the claim, the Court granted Defendant’s motion on the basis that: (i) a written employment agreement governed the intellectual property rights, making unjust enrichment an improper claim; and (2) McFee had failed to allege or otherwise provide evidence demonstrating that she had conferred a benefit upon Defendant.

Breach of Fiduciary Duty and Constructive Fraud. The Court likewise granted Defendant’s motion and dismissed Plaintiff’s breach of fiduciary duty and constructive fraud claims. The Court held that, while the managers of an LLC “owe a fiduciary duty to the LLC’s creditors to treat members of the same creditor class fairly and equally” when the LLC finds itself in circumstances amounting to a winding-up or dissolution, Defendant did not owe Plaintiff a fiduciary duty in the present circumstances. First, Defendant was not a manager at the time the Bay Sales foreclosure sale occurred in 2019. Second, the undisputed evidence showed that CPP was not in “circumstances amounting to a winding-up” at the time of the Pacon sale. As such, Defendant did not owe Plaintiff a fiduciary duty at the time the relevant transactions took place. As the Court held that no fiduciary duty existed, the constructive fraud claim was dismissed as well.

Veil Piercing. As the Court entered summary judgment in favor of Defendant on every claim for relief, the Court also entered summary judgment in Defendant’s favor on Plaintiff’s veil piercing claim.

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McFee v. Presley, 2023 NCBC 90 (N.C. Super. Ct. Dec. 28, 2023) (Conrad, J.)

Key Terms: default judgment; fraudulent transfer; standing; breach of fiduciary duty; constructive fraud; unjust enrichment; N.C.G.S § 39-23.4; N.C.G.S. § 39-23.5(b); veil-piercing

A more detailed factual summary of this case can be found in our summary of McFee v. Presley, 2023 NCBC 89, above. This opinion arises from Plaintiffs Jacqueline McFee (“McFee”) and her solely owned, dissolved corporation, Savage McFee, Inc.’s Motion for Default Judgment against Defendants Bill Stacks, Sabr Leme, Inc., Stacks Holding, Inc., and CPP International, LLC (collectively, the “Defaulting Defendants”). After the Defaulting Defendants failed to answer or otherwise respond to Plaintiffs’ amended complaint, the Court entered default against the Defaulting Defendants in May 2023.

Even after default is properly entered and the defaulting party is deemed to have admitted the factual allegations in the complaint, the Court must still assess the sufficiency of the allegations to determine if they are sufficient to state a cause of action.

Standing. The Court began by ordering Savage McFee, Inc. to show cause why its claims should not be dismissed for lack of standing, as the complaint contained no allegations that Savage McFee took part in any of the relevant events, nor that it was harmed by the Defaulting Defendants.

Breach of Fiduciary Duty and Constructive Fraud. The Court denied McFee’s motion as to the breach of fiduciary duty and constructive fraud claims as they related to the Pacon transaction. The complaint did not adequately allege that Default Defendant Bill Stacks owed a fiduciary duty to McFee because 1) Stacks, as an officer of the LLC, did not owe a fiduciary duty to McFee as a member or employee; and 2) Stacks was not an officer of CPP at the time the Pacon sale was executed and thus he did not owe a fiduciary duty to McFee as a creditor. However, the Court granted McFee’s motion as it related to the Bay Sales transaction, as the complaint alleged that at the relevant time, Stacks was a manager, CPP was winding up, and McFee was a known creditor.

Fraudulent Transfer. The Court granted McFee’s motion as it related to fraudulent transfer under N.C.G.S § 39-23.4 against CPP, as the amended complaint adequately alleged that McFee was a creditor of CPP; CPP was put on notice of McFee’s claim; that substantially all of CPP’s assets were transferred to Pacon and Bay Sales; that CPP concealed these transfers from McFee; and that CPP transferred the assets with the intent to hinder, delay and defraud McFee. The Court denied McFee’s motion as it related to Defaulting Defendants Sabr Leme and Stacks Holding, as the complaint provided no allegations to hold Sabr Leme or Stack Holding liable on a veil-piercing theory. The Court also denied McFee’s motion against Stacks as it related to the Pacon sale, as the amended complaint alleged that Stacks did not acquire ownership in, or become an officer of, CPP until after the Pacon sale was completed. The Court granted McFee’s motion against Stacks as it related to the Bay Sales transaction, as the amended complaint made sufficient allegations against Stack of domination and control regarding the Bay Sales transaction to warrant veil-piercing. McFee’s claim under N.C.G.S. § 39-23.5(b) was denied in full, as the amended complaint did not allege an antecedent debt existed.

Unjust Enrichment. Lastly, the Court denied McFee’s motion as it related to the unjust enrichment claims. Her allegations against Stacks were conclusory and contradictory and otherwise insufficient. Her allegations regarding the other Defendants showed that her intellectual property rights were governed by a written contract, which foreclosed any claim for unjust enrichment.

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BIOMILQ, Inc. v. Guiliano, 2023 NCBC 91 (N.C. Super. Ct. Dec. 28, 2023) (Robinson, J.)

Key Terms: service; summons; Rule 4; Rule 12(b)(5); designated delivery service; FedEx Express Saver; 26 U.S.C. § 7502(f)(2)

This opinion was issued in response to the 12(b)(5) motions to dismiss filed by Counterclaim-Defendants Goodwin Procter LLP and Leila Strickland. On February 6, 2023, Defendants/Counterclaim-Plaintiffs Shayne Guiliano and 108LABS, LLC filed their answer and counterclaims to BIOMILQ’s complaint. Counterclaim-Plaintiffs did not cause a summons to be issued for either Goodwin or Strickland prior to or at the time of filing its counterclaims. After the Court’s inquiry on the issue, Counterclaim-Plaintiffs secured the issuance of summons for service upon Goodwin and Strickland on April 20, 2023.

Counterclaim-Plaintiffs attempted to serve Goodwin and Strickland by FedEx’s “Express Saver” service. The tracking history for Strickland’s summons demonstrated that the materials were purportedly delivered to Strickland on May 2, 2023, but no signature was required or obtained. Counterclaim-Plaintiffs sent the summons and materials to Goodwin through the same “Express Saver” service, addressed to “Goodwin Procter LLP” but not addressed to an individual person. The tracking history shows that the package was delivered to Goodwin’s mailroom on May 4, 2023 and was signed for by an individual. Counterclaim-Defendants moved for dismissal of the counterclaims and third-party claims on the basis of improper service.

Noting that Rule 12(b)(5) requires an action to be dismissed when service of process is not valid, the Court granted both Counterclaim-Defendants’ motions. The Court looked to Rule 4(j)(7)(a) and 4(j)(1)d, which govern service by designated delivery service on a partnership and an individual, respectively. Both provisions require that the serving party deposit the summons and complaint “with a designated delivery service authorized pursuant to 26 U.S.C. § 7502(f)(2)” for delivery. Because FedEx’s “Express Saver” service is not a designated delivery service pursuant to 26 U.S.C. § 7502(f)(2), Counterclaim-Plaintiff’s attempted service did not comply with Rule 4 and was therefore insufficient. The Court found unpersuasive Counterclaim-Plaintiff’s arguments that 1) the list of designated delivery services was not properly before the Court; 2) that the list was illustrative rather than exhaustive; 3) that because FedEx Express Saver meets the minimum requirements necessary to be a designated delivery service, it is a proper method of service; 4) that the policy set forth in N.C.G.S. § 1-75.1 liberalizing the grounds for jurisdiction should prevail over a mechanical application of the law; and 5) that a rebuttable presumption that service was proper applies to their attempted service.

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Loyd v. Griffin, 2023 NCBC 92 (N.C. Super. Ct. Dec. 29, 2023) (Robinson, J.)

Key Terms: judgment; jury verdict; specific performance; breach of contract

Following a jury verdict, the Court issued this Final Order and Judgment. In the Order, the Court analyzed the contract at issue to determine if specific performance was an appropriate remedy. After the jury found that a shareholder agreement between the parties had been amended, the Court concluded that the amended agreement’s language did not require Plaintiff to sell his shares back to Defendant. As a result, Defendant was not entitled to specific performance on its counterclaim, as it was unable to establish the requisite elements of a breach of contract claim.

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CTS Metrolina, LLC v. Berastain, 2023 NCBC Order 68 (N.C. Super. Ct. Dec. 24, 2023) (Earp, J.)

Key Terms: temporary restraining order; injunctive relief; sale of a business; restrictive covenants; misappropriation of trade secrets

This order arises from Plaintiff CTS Metrolina, LLC’s motion for a temporary restraining order against Defendants Dustin Berastain, Timothy Moreau, and Inkwell Emergency Response LLC. CTS purchased the assets of Metrolina Restoration, LLC, a company owned and operated by Berastain and Moreau. As part of this transaction, Berastain and Moreau agreed to certain restrictive covenants, namely noncompetition, nonsolicitation, and confidentiality provisions, and became employed by CTS. CTS later terminated Berastain, and Moreau resigned soon after. CTS alleges that Berastain and Moreau are now affiliated with one of CTS’ competitors, Inkwell, which was founded soon after Berastain’s and Moreau’s exits from CTS. CTS filed the present motion to enjoin Defendants from activity in violation of the restrictive covenants or misappropriating CTS’ trade secrets.

The Court granted CTS’ motion as it related to the restrictive covenants. The Court found that CTS presented evidence sufficient to establish a reasonable likelihood that it will succeed on its claim that the restrictive covenants at issue are enforceable, and that Berastain and Moreau have violated one or more of them through their association with Inkwell. Finding the equities weighing in favor of CTS, the Court issued a temporary restraining order prohibiting certain competitive activity by the Defendants, including the disclosure of confidential information.

The Court denied CTS’ motion as it related to the misappropriation of trade secrets claim, concluding that Plaintiff had not shown a reasonable likelihood of success on that claim because CTS failed to identify the alleged trade secrets in sufficient detail and did not specify the particular measures taken to maintain the alleged trade secrets.

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Londry v. Stream Realty Partners L.P., 2023 NCBC Order 69 (N.C. Super. Ct. Dec. 28, 2023) (Earp, J.)

Key Terms: injunctive relief; pleading standards; ancillary relief

While employed by Stream Charlotte, a commercial real estate services firm, Plaintiff worked with RCC Investors to find a buyer for property RCC Investors was selling (the “PBC Deal”). However, RCC Investors never entered into a listing agreement with Stream Charlotte. After Plaintiff left Stream Charlotte, he began working for his own real estate firm and executed a listing agreement with RCC Investors for the PBC Deal. After Stream Charlotte learned that a purchase agreement had been entered into for the PBC Deal, it demanded that the money it would have received had there been a listing agreement prior to Plaintiff leaving Stream Charlotte be held in escrow. In July 2023, Plaintiff filed suit alleging claims against his former employer for breach of contract, breach of partnership agreement, breach of fiduciary duty, fraud, and unfair trade practices; however, none of the claims involved the PBC Deal. In October, Plaintiff filed a motion for injunctive relief seeking a mandatory injunction requiring Defendants to sign a release allowing the escrowed funds to be disbursed and a prohibitory injunction requiring Defendants to cease all contact with Plaintiff’s clientele. Plaintiff argued that Defendants’ interference with the PBC Deal had damaged him, both financially and personally, and had placed a financial strain on his business.

The Court denied the motion because the complaint (i) failed to assert a claim to which the requested relief could be ancillary; and (ii) sought only damages, not injunctive relief, in its prayer for relief.

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Blueprint 2020 Opportunity Zone Fund, LLLP v. 10 Academy St. QOZB I, LLC, 2024 NCBC Order 1 (N.C. Super. Ct. Jan. 2, 2024) (Bledsoe, C.J.)

Key Terms: receivership; sanctions; violation of receivership order

In March 2023, the Court appointed the Receiver as general receiver for Defendant QOZB to administer the property of the Receivership Estate, including a piece of real property in Greenville, South Carolina (the “Multi-Family Land”). The Receivership Order also provided that the Receiver would have sole authority to act on behalf of QOZB and that the Court retained jurisdiction and supervision over all receivership-related matters. The Receiver subsequently reached an agreement on a proposed sale of the Multi-Family Land and circulated, by email, the proposed contract to counsel for QOZB’s investors: Plaintiffs, CitiSculpt Fund Services, and 10 Academy Opportunity Zone. Approximately two hours later, counsel for Academy and for CitiSculpt Fund Services indicated that they opposed the sale. Minutes later, CitiSculpt Fund Services’ counsel—Smith Currie & Hancock—filed a lawsuit on behalf of CitiSculpt SC, LLC against QOZB in South Carolina state court, seeking a declaration that a parking lease previously entered into was a valid and enforceable encumbrance on the Receivership Estate and recorded a notice of lis pendens against the Multi-Family Land. CitiSculpt SC and its counsel did not seek or obtain leave to file the South Carolina action or the lis pendens and never served the Receiver with either, instead only serving QOZB’s registered agent, a CitiSculpt employee. After finally being notified regarding the South Carolina action in July, the Receiver moved to approve the sale, enjoin the South Carolina action, and award sanctions against the CitiSculpt entities (including McAlpine, which owns and controls the CitiSculpt entities) and their counsel for violating the Receivership Order and for damages and attorneys’ fees incurred. Plaintiffs joined the motion and in support showed that McAlpine had made false statements to the Court.

The Court granted the motion. By attempting to exercise control over the Multi-Family Land through the filing of the South Carolina action and lis pendens, the CitiSculpt entities and their counsel: 1) violated the stay set forth in N.C.G.S. § 1-507.42(c); 2) violated the mandatory venue provisions of N.C.G.S. § 1-507.38(b); 3) violated N.C.G.S. § 1-507.22 which requires any claim relating to receivership property to be heard by the Court; and 4) violated their duties as Responsible Parties under the Receivership Order and as set forth in N.C.G.S. § 1-507.30. Further, the Court found that the evidence regarding false statements made by McAlpine provided further support for sanctions. The Court determined that the arguments advanced by the CitiSculpt entities and their counsel were meritless. The Court ordered the Receiver’s counsel to submit a petition seeking recovery of the Receiver’s actual damages and attorneys’ fees and ordered the sanctioned parties to dismiss the South Carolina action and cancel the lis pendens.

By: Natalie E. Kutcher

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Posted 01/03/24